In our update this month we take a look at three cases that provide helpful clarification from the courts on issues that will be of interest to the insolvency and fraud industry - the key message from each case confirms:
Defendant's threat of insolvency did not prevent adjudicator's decision being enforced.
The case of Bernard Sport Surfaces Ltd v Astrosoccer4U Ltd, decided in September but only recently reported, involved two applications by the claimant: (1) to enforce the adjudicator's decision made against the defendant in July 2017; and (2) to be allowed to continue with enforcement proceedings; a notice of intention to appointment an administrator having been served by the defendant.
Bernards (B) brought adjudication proceedings against Astrosoccer4U (A), in connection with a football pitch at a club in Surrey. B claimed payment after a valid payment notice had been given to A, but no payment had been made. The adjudicator issued an award in favour of B in the sum of just over £175,000.
Following the adjudication, A alleged defects in a football pitch supplied by B, however the matter was not raised by way of a "pay less notice". As A had failed to issue a "pay less notice", the adjudicator could not take the alleged defects into account. A could make a separate claim in respect of any alleged defects but that could not affect A's primary liability to pay the sum awarded by the adjudicator.
A failed to pay B the sums due and B issued proceedings seeking enforcement of the award.
A asserted that the 'counterclaim' it had against B should be taken into account in respect of any sum due in settlement of the award. A's solicitors wrote to B proposing mediation, despite A having earlier acknowledged that the payment was due. That letter also confirmed that if B refused to engage in mediation A would enter into a formal insolvency process and B would face a claim from A's Insolvency Practitioner. B turned down the offer and suggested the course of action proposed by A was an abuse of process and/or would amount to wrongful trading. A's solicitors simply responded by saying "You will get nothing then. Goodbye".
A draft notice of intention to appoint an administrator (NOIA) was sent to B with a further letter encouraging settlement discussions again. A then embarked on various restructuring measures, including entering into a mortgage with a sister company and transferring the shareholding of the company to another company with the same owners. A fresh NOIA was also lodged with the Companies Court, though not filed at Companies House.
B applied for permission to continue with its enforcement application, notwithstanding the NOIA having been lodged at court and the consequential statutory moratorium having been imposed pursuant to Paragraph 43(6)(b) of Schedule B1 of the Insolvency Act 1986.
The Court allowed the claimant's applications.
The judge held that the position taken by A was "a classic example of two directors endeavouring to use Victorian company legislation to avoid paying a due debt". The actions instigated or undertaken by A's directors comprised a completely bogus series of events aimed at preventing the debt from being paid. In summary:
- The NOIA was defective because it contained no minutes;
- The NOIA had not been filed at Companies House;
- There was no evidence of actual insolvency; A was still trading through its company website and had a lease with a football club that was still participating in the league; and
- The only reason there was a negative figure in the accounts was because of the inter-company loan which was completely unexplained.
The court also went on to criticise A's solicitors for their "connivance", the judge noting that some of their correspondence had been "breathtakingly rude" and evidenced "an intention to misuse the insolvency proceedings".
Permission was therefore granted for B to continue with the enforcement proceedings and judgment was entered against A in the sum of £175,962.47, plus interest and costs.
The decision emphasises that the Court will not tolerate the misuse of insolvency proceedings to avoid paying a debt which is legitimately due and in circumstances where the debtor is not insolvent. In this case, serving a NOIA when there was no evidence of actual insolvency, nor any justification for threatening insolvency resulted in the court setting aside the NOIA.
Scottish courts do not have jurisdiction over insolvent companies registered in England and Wales
The Scottish court has recently confirmed it has no jurisdiction to make an administration order in relation to a company incorporated and registered in England and Wales, despite its centre of main interest (COMI) allegedly being in Scotland.
In Bank Leumi (UK) Plc v Screw Conveyor Limited a petition was lodged by Leumi (L), a creditor of Screw Conveyor (S), seeking an administration order. S was incorporated in England and Wales and had its registered office in Birmingham. Notwithstanding this, L asserted that S had its COMI in Scotland and as such the Scottish court would have jurisdiction over the application.
Regulation (EU) 2015/848 (the Regulation) provides at Article 23 for the main insolvency proceedings to be opened in the Member State where the debtor has its COMI. Article 26 of the Regulation goes on to say that the rules of jurisdiction set out in the Regulation only establish international jurisdiction; territorial jurisdiction within a Member State should be established by the national law of the Member State only.
Article 3 confirms that the courts of a Member State within the territory - where the debtor's COMI is situated - will have jurisdiction to open insolvency proceedings. However, in the case of a company or legal person the place of the registered office shall be presumed to be its COMI, unless evidence to the contrary is shown.
L asserted that under Article 3 the company's COMI was in Scotland. S120(6) of the Insolvency Act 1986 (IA 86) incorporated Article 3 into domestic law and the provisions of Article 3 were therefore applicable for the purposes of determining jurisdiction between the constituent parts of the UK. L argued that where a company had its COMI in Scotland (as it did here) the Court of Session had jurisdiction. L did, however, accept that there was no direct judicial authority available to support this position.
The court held that S120(1) IA 86 confers jurisdiction on the Court of Session to wind up a company registered in Scotland. Subsection (6) qualifies subsection (1). The qualification is that in circumstances where a company registered in Scotland has its COMI in the territory of another Member State, it is the courts of that Member State, rather than the Court of Session, which have jurisdiction to open insolvency proceedings.
The same observations apply to section 117(1) and section 117(7) IA 86. Section 117(1) confers jurisdiction on the High Court to wind up a company registered in England and Wales. There is no indication, in the language of section 120(6) or section 117(7) or in their legislative context, of a legislative intention to innovate to any greater extent upon the domestic law applicable for determining jurisdiction as between the jurisdictions comprising the United Kingdom.
The Scottish Court did not have jurisdiction to make an administration order and the petition was dismissed.
This decision has provided some welcome clarity on this issue. It was not unexpected but it does provide confirmation (if such were needed) that the Scottish and English rules on insolvency are different and that creditors need to ensure proceedings are issued in the court that has jurisdiction to rule on them.
Sharing of information between common office holders of connected estates
The Chancery Court has considered the proper use of documents and information obtained under compulsion by liquidators and trustees in bankruptcy, and the circumstances in which such information can be shared where there are common office-holders of connected insolvency estates.
In the case of Willmont & Finch and Willmont & Sayers v Shlosberg (In The Matter of Webinvest Ltd) the joint Liquidators of a company (W), and the joint Trustees in Bankruptcy of a connected bankrupt (S), applied to the court for guidance on the proper use of three categories of documents and information.
The documents related to W and S's insolvent estates. S was the beneficial owner of W. One of the Liquidators of W was also one of the Trustees in Bankruptcy for S (Mr Willmont), which is not uncommon. The other Liquidator and the other Trustee were from the same firm as Mr Willmont and all of them were supported by the same support staff. The same firm of solicitors was involved in advising both the Liquidators and the Trustees and, save with respect to certain privileged documents, no information barriers had been put in place.
The categories of documents and information in relation to which directions were sought comprised the following:
- Documents and information obtained under compulsion;
- Disclosure documents; and
- Privileged documents.
The Court accepted that it was not unusual for there to be one or more common office-holders of connected insolvency estates; the benefit of such an arrangement being that one set of office holders could investigate the same transactions. This necessarily assumes that information relevant to each estate will, where appropriate, be pooled by the office-holders.
On the question of sharing documents and information the court held as follows:
This was material obtained from third parties pursuant to the relevant office-holders' powers to compel third parties to provide documents and information, or as a result of the threat of the exercise of such powers ("Compulsion Material").
The principal purpose of any documents / information delivered in this way is to assist with the beneficial winding up of the company or bankruptcy of the individual in question. There is established case law which confirms the powers of compulsion allow the liquidator or trustee to discover the true circumstances of the insolvency – so that the office holder may as effectively and with as little expense as possible, complete his functions.
The Liquidators and Trustees asserted that it was permissible to share Compulsion Material between them as (1) there was the prospect of a surplus in the liquidation of W, which would result in a dividend to the bankruptcy estate; and (2) the disclosure would assist in investigations by both the Trustees and the Liquidators into suspected dishonest transactions allegedly carried out by S.
The court held that, in the circumstances, the information could be shared. There was a chance that there could be a surplus in the liquidation of W and the Compulsion Material might assist in establishing that position, furthermore the material might also assist investigations into the alleged dishonest transactions. Information could be shared between the office holders without further permission being needed on this basis. However permission would be needed before disclosure could be made to third parties.
The Disclosure Material consisted of documents disclosed by S in separate proceedings known as the 'Conspiracy Claim'. The proceedings involved a claim by the Liquidators against S (and others).
The issue was whether the inspection by Mr Willmont as Liquidator (or by the Liquidators' solicitors) of documents disclosed in proceedings to which the Liquidators were a party constituted a breach of the Civil Procedure Rules, which provides (in CPR 31.22) that a party to whom a document has been disclosed may use the document only for the purpose of the proceedings in which it is disclosed except where:
- The document has been read in court or referred to in open court,
- The court gives its permission; or
- The parties to the proceedings agree.
S was refusing to allow inspection of those documents by Mr Willmont and his solicitors on the basis that the documents might contain material relevant to his bankruptcy and that Mr Willmott might also use the information in his capacity as one of S's Trustees in Bankruptcy.
The court dismissed the claims of S and held that Mr Willmont and his solicitors could inspect the documents disclosed in the proceedings. Mr Willmont would be unable to rely on the disclosed documents for any other purpose, unless any of the exceptions in CPR 31.22(1) applied. The judge did not accept that there was any real risk of unconscious use of the Disclosure Material for purposes other than the proceedings at hand.
The final category of material concerned material over which S had a claim to privilege, which was not joint with W.
In an earlier case involving the same insolvencies (Avonwick Holdings v Shlosberg), the Court of Appeal found that legal professional privilege in documents is not property that vests in a trustee in bankruptcy. As a result (save in respect of some specified documents) the court held then that S's privilege had not been transferred to the trustees; it was retained by S.
The Trustees sought approval of a 'Privileged Material Segregation Protocol', which was proposed for the protection of the Privileged Material. Despite concerns raised by S the court held that this protocol provided S with adequate protection over documents to which he claimed privilege. Any material that may be privileged would be reviewed by a third party (with assistance from the other Trustee in Bankruptcy) and it would only be provided to Mr Willmont if that review concluded the material was not privileged.
This decision provides helpful clarification on how common office holders can properly use information obtained in relation to one estate where it is also relevant to another. This is clearly a topic which is receiving a significant amount of consideration at the moment and no doubt the law in this area will continue to develop.
On the issue of privileged material and the restrictions on a trustee in bankruptcy in relation to that material, see our detailed analysis here: Legal privilege - Human right or fraudster's shield.